Gold and the US Monetary Base Signal the Greatest Depression

Gold and the US Monetary Base Signal the Greatest Depression

Gold is currently trading in excess of $1200 an ounce. This is well above the 1980 all-time high. However, this is an incomplete representation of what gold is trading at relative to US dollars. When you look at the gold price relative to US currency in existence, then it is at its lowest value it has ever been. This is an example of how paper assets are completely out of tune with tangible (real assets).

The US monetary base basically reflects the amount of US currency issued. Originally, the monetary base is supposed to be backed by gold available at the Treasury or Federal reserve to redeem the said currency issued by the Federal Reserve. The Federal Reserve does not promise to pay the bearer of US currency gold anymore; however, it does not mean that gold (it’s price and quantity held), relative to the monetary base has become irrelevant.

When the US monetary base gets too big relative to the gold price (& US gold reserves), then market forces seek to correct the situation. This has happened a number of times over the last 100 years, but on two occasions, it was so critical, that the situation actually over-corrected. This was during the 30s and the 70s.

Below is a chart from inflation.us, which illustrates this:

It shows the extent to which the US monetary base was backed by the official US gold reserves over the last century. Note that even under the gold standard, US currency was not fully backed by gold.

One can see the two occasions (1933 & 1970) when the lack of gold backing became so critical that the gold price corrected to a situation where US gold backing actually became more than 100%.

What differentiate these two occasions from other times when the ratio of US gold backing was also low (like 1921, for example), is the timing relative to economic conditions. The low level of gold backing in 1933 came after a period of massive credit extension (the roaring 20s), and a few years after the Dow’s 1929 peak. At that time (post 1933) the economic conditions were such that the ability to extend credit was severely limited, due to the excesses caused by the credit extension during the 20s. This led to reduced economic activity over the following years.

In a similar manner, the 1970 low level of gold backing came after a period of massive credit extension (post-war period), and a few years after the 1966 Dow peak. At that time (post 1970) the economic conditions were such that the ability to extend credit was severely limited, due to the excesses caused by the credit extension during the post-war period (to early 60s).

This led to reduced economic activity over the following years. Note that the 70s were a bit different because debt levels relative to GDP were low as compared to the 30s.

Currently, the gold backing of the US monetary base is at all-time lows, and it appears that we have reached a point similar to that of 1933 and 1970. In a similar manner to the 20s and the post-war period, we had massive credit extension from the late 80s. Furthermore, the Dow appears to have peaked like it did in 1929 and 1966.

This period seems to be more like the 30s than the 70s because debt levels relative to GDP are excessively high. Deteriorating economic conditions, with high relative debt levels and an inability to extend credit further are the worse conditions for banks to operate under. These were the main reasons for the banking crisis of 1933.

This will be the main reasons for the coming (already happening) banking crisis. The lack of confidence in banks will be a critical part of the coming gold rally. Remember that if we were to get a 100% gold backing of the US monetary base, based on current US official gold reserves, gold would have to be trading in excess of $15 000.

Greatest Depression

Previously, I have written about the Gold to Monetary Base ratio chart. There is a strong fractal analysis signal that the worst economic (and political) years are straight ahead, and this agrees with the expectation above. I believe the coming period will be far worse than the Great Depression.

Below is that Gold to Monetary Base ratio chart (from macrotrends.net), I have previously featured, as well as some commentary (italics) that went with it:

On the chart, I have indicated the three yellow points (a) where the Dow/Gold ratio peaked. These all came after a period of credit extension, which effectively put downward pressure on the gold price. Points 2 were placed just to show the similarities of the three patterns.

After the peak in the Dow/Gold ratio and point 2, the Gold/Monetary Base chart made a bottom at point 3 on each pattern. It is at these points that the monetary base could not expand relatively faster than the gold price increased. Today, this could mean that the point at which the game is up for those who are short gold.

I do not know if point 3 is in on the current pattern; however, given the fact that the bullion banks are under pressure as indicated in the spike in the gold coverage ratio at the COMEX, it might well be.

Since then, the ratio has started spiking upwards, due to the spike in the gold price, and the drop in the adjusted monetary base. It actually seems that point 3 could very well be in.

After point 3 in November 1932 and December 1970, very bad economic years followed. During the Great Depression 1932 and 1933 was in fact the worst years of the entire Depression. Again, current pattern (or period) is more like the Great Depression period than that of the 70s.

I believe we will will have similar events in the immediate future:

gold and silver revaluation (probably mainly in the open market) – this will mainly be in the form of currency devaluation.

major government (especially the USA) and corporate bankruptcies/defaults

increase in wars (all kinds of wars)

banking collapse

and much more..

When you compare the current pattern (1980 to 2016) to that of the Great Depression one (1920 to 1932), it gives you a visual of how much worse the current depression (The Greatest Depression) will be.